Core values: where to next for Apple?

FEW COMPANIES have ever had a year as dramatic as Apple’s past 12 months. From the resignation and death of founder Steve Jobs to controversy over its Chinese manufacturing operations, from becoming the world’s largest company by market cap to winning a landmark patent dispute against rival Samsung, the California company has rarely been out of the headlines.

The spotlight is back on Apple after the company revealed its highly anticipated new iPhone yesterday – analysts expect 10 million to 12 million sales of the new phones in

September alone, while JP Morgan estimates that it will add up to 0.5 per cent to US GDP growth.

And at some point in October, speculation is rife that Apple will launch a smaller version of the iPad, most likely featuring a 7.85in screen.

These could be the most critical product releases in years for a company whose astonishing revenues and growth – with its valuation soaring nearly 9,000 per cent since 2003 – seems to rely on its ability to regularly churn out blockbuster products.

Any hint that the products fall short of expectations or fail to ignite the customary fervent reaction from the company’s committed fans will be interpreted as a sign that, in the post-Jobs era, the magic touch is waning.

But one of the most astute analysts covering the company, Horace Dediu, insists that the market’s attitude towards the company, and the focus on the company’s hit releases, is misguided.

“My impression is that the company is considered fragile, that it relies on these hit products, which very quickly become swamped by competitors, which become commoditised if you will. So it depends on, only survives, because it is able to create another breakthrough product.”

Dediu points out that “the company is trading at a very, very, very depressed valuation of 15 times earnings. It’s almost a disposable valuation. It’s considered less valuable as a company than your average consumer electronics company.”

Indeed, suggestions that the stratospheric rise in its share price and massive market cap is evidence of an Apple bubble are common.

Dediu, a Romanian-American former Nokia executive who has gained a reputation as one of the most perceptive analysts in the business since founding research firm Asymco in 2010, suggests that such an approach is misleading. He cites another former Steve Jobs company, Pixar, as illustrative of the double standard.

“Pixar figured out how to manufacture blockbusters. As a result it was bought at a very high valuation. But Apple doesn’t have a valuation that implies it’s a blockbuster-manufacturing company. It’s priced as if it’s an average company that happens to have a few very good products in its repertoire today.

“But it isn’t priced in a way to say it’s going to keep going. It just happens that these are huge products and is enormously profitable, but that’s on an absolute scale. On a relative scale, it doesn’t seem to be something that people are willing to say is long-term. That’s the paradox of Apple – it’s huge in the absolute sense, and tiny in the relative sense.”

One of the reasons Apple fascinates as a company was due, of course, to the mercurial and magnetic persona of Steve Jobs, and while his successor Tim Cook has shown himself to be a sure hand as chief executive, all perceptions of the company are seen through the prism of Jobs. The expectation that the company will struggle in Jobs’s absence is hard to dispel.

“I would have a lot of confidence in that Tim Cook is a process guy, he’s concerned about making the trains run on time, as they used to say,” says Dediu. “In that sense, he has to think of the business itself as a process, so he should be codifying it and optimising it and trying to understand it. I’m confident of Tim Cook being conscious of the project and hopefully that would allow the legacy of Jobs to continue, even if Jobs may not have known what he was doing exactly, even if he was just being instinctive.”

Understanding that process and analysing those instincts has developed into a kind of technological Kremlinology, and a big business in its own right, but Dediu suspects the answer is somewhat more straightforward.

“The weird thing is that Apple’s products are not particularly earth-shattering, they’re just well-executed,” he says. “This is all very much a Jobsian thing; you pick your fights carefully, and you execute as well as possible, keep it in incubation as long as necessary, and then release it when it’s good and ready. It requires so much polish and confidence in the result, and it usually resonates well with the consumer. It’s a simple formula in reality, I think, but one very few companies can do, either because they don’t have the patience, the confidence or the focus.”

The recent trial victory over Samsung has highlighted the manner in which Apple dictates the direction of the industry, and zealously protects its intellectual property. But Dediu suggests that it’s not the hardware or software designs other companies should be paying attention to.

“When people ask me what should Samsung do, what should Nokia do, what should Microsoft do, and I tell them ‘Be more like Apple’, that doesn’t mean much. What I mean to say is, don’t copy their products, copy their way of making products. That’s very difficult, it turns out.”

However difficult to replicate, it’s an approach that might well prove to be the company’s signature achievement.